You want to minimize your tax obligations before the 2019 filing deadline. We all do.
But what last-minute financial moves are you making before the end of the calendar year? By leveraging these five common tax strategies right now, you can minimize what you owe Uncle Sam come April.
The sooner you get started, the more time you will have consult a tax pro to ensure they work for your situation. Let's dive in to the best tax strategies for doctors before the ball drops.
1. Sell off investment losses.
You bought a “hot stock” a few years ago --- only to watch it tank shortly after. Or maybe you purchased some land hoping that demand would increase its value. You have held on to these assets hoping they would increase enough for you to break even. (Patience is a virtue, right?)
But how do you know when it's time to cut them loose?
Assets worth less than what you invested can be used to decrease your overall capital gains taxes. If you sell, use the capital losses to offset capital gains in any assets you sold for a profit. If your capital losses exceed your gains in a tax year, you can deduct them from your ordinary income --- up to $3,000.
For example, say you sold shares of two companies this year:
- One netted you a profit of $5,000.
- The other you sold for a loss of $7,500.
Since your overall capital loss is $2,500, you can deduct that amount from your regular taxable income.
2. Donate appreciated assets instead of cash.
Many people make year-end contributions to their favorite charities. And the recipient isn't the only one who will benefit. It can also reduce the giver’s taxable income by serving as a deduction.
Perhaps you’re also planning to sell an appreciated asset, such as company stock. Maybe because you anticipate it decreasing in value in the near future. Or maybe simply because you need the cash.
Selling an appreciated asset means owing tax on the capital gain. (This is the difference between the sale price and the amount you’ve invested in the asset.)
However, giving the asset directly to a nonprofit organization means:
- You will not owe the capital gains tax.
- You will also receive the charitable deduction based on the asset’s value.
Say you plan to give $10,000 to charity near and dear to your heart this holiday season. You also plan to sell $10,000 worth of stock because you believe it’s overvalued. Because you initially paid $1,000 for the shares, you will need to report a capital gain of $9,000.
Assuming you’re in the highest tax bracket (most doctors are), you’ll have to pay a capital gains tax of 20 percent on that $9,000. That comes out to $1,800.
But what if you give the stock to the charity without selling it? Doing so means:
- You won’t owe the capital gains tax.
- You still can deduct the $10,000 charitable contribution.
That means you essentially save $1,800 in taxes.
The key to this strategy is to directly transfer ownership to the nonprofit. If you sell first, it will not work.
3. Stash more for retirement
Hopefully, you already participate in your employer’s 401(k) plan. (If not, you definitely need to consider!)
But are you contributing the maximum amount?
- From 2015-2017, the 401(k) maximum was $18,000.
- In 2018, it increased to $18,500.
- Under the Tax Cuts and Jobs Act, this will increase again to $19,000 in 2019.
Fortunately, most employers allow participants to increase their contributions at any point during the year.
Doctors and other high-income earners should stash as much as possible. After all, you can afford to do so.
4. Accelerate monthly payments.
If you itemize deductions, you can deduct your state and local taxes from your federal tax bill.
Try to pay any taxes due in early 2019 by the end of December 2018. This can net you a higher federal tax deduction.
For homeowners, this also applies to:
- Mortgage interest.
- Property taxes.
Making your January payment in December will allow you to deduct those expenses this tax year.
5. Think ahead to 2020.
Are you due a substantial increase in your income in 2019? (We sure hope you are.) Then you actually may want to consider the opposite approach.
Remember --- if you do secure a well-earned raise, one year from now this will:
- Increase your tax obligation.
- Potentially push you into a higher tax bracket.
That means paying a higher percentage of your overall taxable income to the government in April of 2020.
But you can minimize risk by:
- Accelerating your taxable income to this year.
- Delaying some deductions until next year.
That means you may want to bill sooner to get more income in-house before year's end. Also, consider selling profitable assets now to pay the tax this year before moving up a bracket next year.
For deductions on charitable donations, taxes, and mortgage interest, try to wait until the new year. If possible, this will lower next year’s taxable income.
Tax season is right around the corner. Although you still have plenty of time before you need to file, certain steps can be taken before the end of the calendar year to minimize your tax obligations. Depending on your situation, this may include:
- Selling off investment losses.
- Donating appreciated assets.
- Stashing more for retirement.
- Accelerating monthly payments.
- Thinking ahead to 2020 (and beyond).
Although simple and effective, be sure to consult a seasoned pro before pursuing any of these year-end tax strategies.